Over the last few years China has emerged as one of the world’s engines of growth. With the United States and European Union suffering from slow growth, China established itself as one of the most dynamic and fastest growing economies in the the world. Now, however, China’s manufacturing PMI has fallen into the red for the second straight month and if anything, the slowdown appears to be accelerating.
The preliminary HSBC PMI reading came in at 48.3, representing a considerable contraction. In January, the reading came in at 49.5, which represented a slight contraction. This suggests that China’s contraction of the manufacturing sector is accelerating.
The HSBC PMI reading is not the official reading. The official reading includes more state owned companies, many of which receive substantial assistance from the government. This reading often outperforms the HSBC reading but the strong contraction suggested by the HSBC PMI suggests that even the official reading could be negative.
Markets rattled by announcement
China is now the world’s second-largest economy and many Asian nations are closely integrated with it. With China’s economy weakening, stock markets across Asia sunk into the red. Hong Kong’s Hang Seng index lost more than one percent, while Japan’s Nikkei index shrunk by over 2 percent. Interestingly, the Shanghai index weathered the storm and only lost .2 percent.
The turbulence should come as no surprise. Many of Asia’s complex supply chains end in China, so if demand shrinks there, it will be felt along the whole supply line. Fewer orders means less demand for components from other countries, such as Singapore. Less output means that fewer goods will have to be shipped and stored.
Chinese government caught between a rock and a hard place
Some analysts are urging the Chinese government to do more to prop up the economy. The government, on the other hand, has been trying to avoid expensive stimulus measures. With many local Chinese governments buried in debt, increased loans could put the country’s financial system at high risk.
The government has also been trying to tighten up its monetary policies in order to curb the growth of the shadow lending industry and to prevent any financial bubbles from building. Now, however, there are increasing calls to loosen up monetary policies and increase liquidity.
For its part, the government does not seem perturbed by slower growth. The government is concerned, however, with employment and maintaining forward momentum. High unemployment and a slowing economy could result in increased pressure from the country’s citizens, which the Communist Party is keen to avoid.